Market Commentary

The U.S. has sold $13 billion 30-year bonds at a yield of 4.679%. The market was expecting around 4.70% so it was about 2 basis points stronger-than-expected, which is quite a lot. The yields in the spot market have fallen about 3 basis points since the data was released. The bid-to-cover ratio was 2.89 compared to the 2.48 average in the last 10 auctions.  USD/JPY has slipped a tad as U.S. interest rates drop. The overall signal, however, is bad for risk appetite as it appears there is a high demand for safe assets. Yesterday's 10-year auction was also stronger than expected.

U.S. Senator Christopher Dodd will release his version of legislation to overhaul U.S. financial regulation on March 15. Dodd had been working with Republican Bobb Corker to try to find a consensus but it now appears he is going to go it alone. He said the proposal will "reflect [Corker's] input and the good work done by many of our colleagues." He said he still hopes to come to an agreement with Republicans. Bloomberg is reporting that it will likely a consumer protection agency that falls within the Federal Reserve, according to their sources. It's unclear what mechanism there will be to wind down failed financial firms.

Swiss National Bank policymaker Hildebrand appeared on Swiss broadcaster SF1, saying the central bank won't continue its "expansive" monetary policy forever and that he sees a threat that a property bubble may emerge. After some initial volatility following the SNB rate decision, EUR/CHF has settled into a tight range. It was most recently at 1.4617.

ECB governing council member Gertrude Tumpel-Gugerell spoke in an article for Italian magazine Format, saying the eurozone has passed the test of the crisis. She also said that Greece must now implement the proposals to cut its budget deficit. She added that member countires need to co-ordinate economic policies and that budgets must be discussed.

U.S. Treasury Secretary Timothy Geithnetr said "new rules" are needed to end the problem of "too big to fail" in a statement commenting on Senator Chris Dodd's plans for financial overhaul. Geithner also said the plan needs to "close loopholes" and protect consumers. As would be expected, there has been no market reaction to the comments.

In an interview with Austrian newspaper Die Presse, ECB Governing Council member Ewald Nowotny noted that euro zone “growth rates are positive but weak”. The central banker added that the region’s “problems have shifted to the real economy, [where] unemployment is rising “and “the danger of [company] credit defaults...could possibly increase.” He predicted that it could take between two and three years for the euro zone economy to fully heal. The euro didn’t seem too impressed by Nowotny’s downbeat appraisal of regional growth prospects – following the interview’s publication, EUR/USD slipped by 14 pips to $1.3660USD, a level nonetheless well above the pair’s intraday low of $1.3621USD.

Canada’s Budget Office has released a report that forecasts that the nation’s deficit will contract to C$12.3 billion by 2014 from C$53.8 billion in the fiscal year ending this month. The projection is at odds with Canadian Finance Minister’s forecast last week that the deficit will fall to C$1.8 billion by 2014. The announcement had no major impact on the Canadian dollar, with USD/CAD bouncing around in a 10-pip range between C$1.0290 and C$1.0300 following the report’s release.

“Canada’s economy is already starting to create jobs,” the country’s prime minister, Stephen Harper, told parliament in Ottawa on Thursday. Nonetheless, he said the unemployment rate, currently at 8.3%, is “still too high”. Harper also said the domestic housing industry is “well into recovery” and the availability of credit is improving. Nonetheless, he said that Ottawa will continue to stimulate the economy. Despite the Canadian prime minister’s upbeat economic assessment, the Canadian dollar weakened slightly versus the greenback following his remarks: USD/CAD rose by 14 pips to C$1.0302. Investors were probably focusing on the fact that fiscal stimulus will continue in the near term.

In an interview with French daily Le Figaro, the country’s president, Nicolas Sarkozy, said that he neither supports a weak nor a strong rate for the European single currency. He said that “between a strong euro and a weak euro, I choose a euro at a fair level.” Sarkozy also suggested that the euro at $1.36USD may still be too high for the monetary union’s exporters. The euro is currently flat on the session at $1.36757USD. So far today, EUR/USD has traded in a $1.3621USD to $1.3687USD range. Resistance rests up at $1.3705USD from March 8 and then $1.3736USD from March 3. Support, on the other hand, lies down at $1.3537USD from March 3 followed by $1.3531USD from two days before that.

After declining by as many as 9 U.S. cents between Feb. 17 and yesterday, GBP/USD is currently positive on the day at $1.5005USD. However, cable is just 25 pips higher and well below its peak on Thursday of $1.5065USD. There is also a number of hours remaining before GBP/USD can say that it’s had its first positive session of the week. Resistance for the pair rests up at $1.5196USD from Monday and then $1.5575USD from Feb. 23. Meanwhile, support lies down at yesterday’s low of $1.4873USD followed by $1.4784USD from March 1.

Earlier on Thursday, Beijing announced that China’s headline CPI rises 2.7% year-over-year in February, accelerating from the prior month’s 1.5% increase and outpacing calls for a 2.5% pickup. The result was the fastest rise in consumer prices in 16 months. Responding to the announcement, Morgan Stanley Asia Chairman Stephen Roach said, “They are now moving back up to a positive inflation rate in a 3% to 4% zone, after going through deflation in the crisis”. Speaking in an interview with Bloomberg Radio, he added that Beijing will try to cap its inflation pace at 5%. He said, however, that he doesn’t expect the Chinese government to announce any “dramatic” policy moves to combat prices in the coming months. Following Beijing’s announcement early on Wednesday morning GMT, the yen strengthened versus the greenback. At present, USD/JPY is flat on the session at 90.51 versus a low of 90.21 and a high of 90.72. Resistance rests up at 90.82 from yesterday with support at March 9’s low of 89.63.

Over in Europe stocks are in ‘risk off’ mode: the German DAX equity index was recently lower by 0.3%, while the UK FTSE 100 is faring even worse – it’s weaker by 0.6%. Meanwhile, the opening bell of the New York Stock Exchange will ring in less than fifteen minutes. U.S. equity futures are pointing to downbeat early trading, with both S&P and Dow futures down 0.3%. ‘Riskier’ currencies are feeling the risk aversion in stocks. EUR/USD was recently just 10 pips away from its session low of $1.3621USD and down 26 pips on the session, while AUD/USD is on the perch of its worst level today at $0.9117USD compared to a low just five pips below that. The exception, in relative terms, is cable, with GBP/USD 22 pips higher on the day at $1.5000USD, though well below its peak on Wednesday of $1.5065USD.

Gold attempted to rally after the U.S. data but was stuffed at $1110 and instead fell below yesterday's low to $1102. Expect some psychological support at $1100 but there's nothing in the technical picture to suggest any strength today.

All the North American data for the day was released simultaeously at 8:30 a.m. EST. U.S. initial jobless claims fell to 462K in the week ending March 6, down from 468K the week prior but a shade above the 460K expected. Continuing claims were expected to hold steady at 4500K but were reported at 4558K. The U.S. trade balance was exepcted at -$41B compared to the $-$40.2B reading in Decemeber but the deficit fell to $37.3 billion and the prior was revised to -$39.9B. Fourth quarter Canadian capacity untilization was expected at 70.0% from 67.5% in Q3 but it came in at 70.9% and the prior was revised to 68.7%. Canada's house price index rose 0.4% in Jan as expected; it was the same rise as the month before. Canadia's merchandise trade surplus was expected at C$0.2B after a C$0.2B deficit in December but the surplus was C$0.8B.

The knee jerk reaction led to a 20 pip rally in EUR/USD to a fresh two-day high of 1.3686. The U.S. dollar also weakened against the yen while USD/CAD has been relatively unchanged. Overall, most of the data is relatively in-line so the market shouldn't have too much to get excited about here.

The Swiss National Bank held interest rates at 0.25%, as expected. They also said they will "act decisively" to prevent CHF appreciation. The see inflation in 2010 at 0.7% and in 2011 at 0.9%. They previously forecast 0.5% inflation in 2010 and 0.9% in 2011. They see the economy growing about 1.5% in 2010 compared to previous call for 0.5-1.0%. They say "considerable uncertainties" remain around their forecasts and "significant risks" are attached to the global outlook. They say the Swiss recovery remains fragile and that deflation can't be entirely ruled out. This suggests that quantitative easing is still a possibility. They also talk about a "bleak" outlook on budgets as a global threat. EUR/CHF spiked to 1.4630 on the possibility of continued intervention from the SNB but has since pared its gains back to 1.4613. Overall, the tone of the statment in more dovish than expected but the continued possibility of SNB selling in EUR/CHF sparked a round of short covering.

At 8 a.m. EST, the Swiss National Bank will announce interest rates. The SNB is expected to be unchanged today, but key to the SNB’s monetary policy assessment are the SNB’s inflation projections. Beyond that, focus will centre on the language of the statement.  The SNB will have to stop intervening in CHF before raising rates, so the timing of hikes sets a deadline for intervention in EUR/CHF.

The BoE's Q1 Inflation Attitudes survey sees inflation expectations over the next 12 months just a shade higher at 2.5% vs. 2.4% at the time of the last survey in Nov. The GBP is the top performing major after the rise.

The Chinese retail sector outpaced expectations in February, but industrial production came short, according to reports from local authorities on Thursday. Retail sales advanced 22.1% year-over-year in February, beyond expectations for an 18.1% increase, while industrial production advanced 12.8%, short of calls for a 19.0% increase. According to Bloomberg news, the prior month’s data were unavailable. The data pains a mixed picture for the country’s economic recovery, although overall the downside in industrial production is likely the more important development given the export heavy composition of the Chinese economy. That being said, a stronger than expected CPI report released just moments ago is spurring expectations of tighter monetary policy in China, a development which are boosting the USD and yen.
 

The U.S. dollar and yen are finding some support against major currencies on the back of some stronger than expected inflation data out of China. Headline CPI rose 2.7% year-over-year in February, accelerating from the prior month’s 1.5% increase and outpacing calls for a 2.5% pickup. Meanwhile the producer price index advanced 5.4% compared to calls for a 5.1% pickup and prior 4.3% rise. The purchasing price index rose 10.3%, beyond calls for an 8.5% gain and previous 8.0% increase. The news suggests that Chinese officials may have to tighten monetary policy more than expected, a development which has put upward pressure on the greenback and yen. EUR/USD fell 10 pips on the news to 1.36.32 and USD/JPY declined 15 pips to an intraday low of 90.28.
 

The global volume of forex trading increased by 17% between April and October 2009, according to a report from the Reserve Bank of Australia. Citing data from Australia, the U.S., UK, Canada, and Singapore, the central bank said FX trading increase to $2.7 billion over that time period. The implications for trading are clear. More traders means more opportunities.
 

The Australian dollar is under pressure on the back of a weaker than expected employment report released just moments ago. According to local authorities, the economy created 0.4k jobs in February, short of the prior month’s 56.5k gain and expectations for a more modest 15.0k increase. Meanwhile, the unemployment rate rose to 5.3% from 5.2% the month prior, in line with forecasts. The news put pressure on the Australian dollar, with the currency losing 15 pips to the USD at 0.9121. So far today, the pair has traded in a range between 0.9121 to 0.9157. Short term resistance lies at 0.9243, and 0.9328, with support at 0.8979, 0.888 and then 0.8801.